According to a Reuters report earlier this month, private equity firm Bain Capital wrote down 35 percent of its investment in HD Supply to $617 million. Like many banks and other investors during the M&A boom period, Bain is now taking a hit on the value of its investment made in better times.
 
Home Depot sold its HD Supply wholesale distribution unit to a trio of private equity firms – Bain Capital, Clayton Dubilier & Rice, and Carlyle Group – in August 2007. The terms were as follows: Purchase price of $8.5 billion, The Home Depot to own a 12.5% equity interest for $325 million, and The Home Depot guaranteed a $1 billion senior secured loan. The acquisition included a portfolio of 11 businesses and HD Supply Canada, and total annual revenues of $12 billion. That deal started with a purchase price $2 billion higher, but was renegotiated due to tightening credit conditions.
 
You may remember that during the dot-com bubble, the ratio of goodwill to assets was insane – in some cases it seemed like the highest-value assets in some of those companies were the Herman Miller chairs! There was a not-surprising tightening of accounting rules in 2002, where companies now have to test goodwill each year for impairment, whereas previously they could amortize it over several years. As the Reuters article points out, accounting rule FAS 157 took effect in November 2007 and requires private equity firms to now value their companies as if they were going to sell them today.
 
Based on the valuations of even two years ago in wholesale distribution sectors, we will certainly see more write-offs. Publicly traded distributors particularly will be scrutinized by their accounting firms for the goodwill of major acquisitions made a few years back. Even though these write-offs are non-cash items, they have the potential to decrease overall book value and increase leverage ratios at a time when banks are tightening terms.